Cigarette smugglers waiting? Officials not worried, even if tax surges

March 30, 1992|By David Simon | David Simon,Staff Writer

In the late 1960s and early 1970s, one Northeast state after another raised excise taxes on cigarettes and waited for the money to roll in. But what actually rolled into states such as Pennsylvania and New York was semi-truck after semi-truck loaded with smuggled cases of cheap cigarettes from North Carolina.

Yet, as Maryland legislators now consider tax proposals that could raise state taxes on cigarettes by as much as 20 cents a pack, law enforcement officials are not exactly filling the sandbags for a coming flood.

Whether Maryland -- if it does become a high-tobacco tax state -- will see anything similar to the cigarette wars of the early 1970s is uncertain. But officials say the methods used today to ensure tax compliance are superior to those used a generation ago. Crime patterns have changed as well, officials say.

"We're not seeing very much [organized crime] activity around cigarettes," said Agent Linda Vizi, a spokesman for the FBI field office in Philadelphia, where the mob infiltrated the cigarette wholesaling business in the early 1970s. "Mostly, they've found that there's more money to be made in drugs or in schemes involving organized labor."

"We don't take on that many cigarette cases, less than 10 a year," added Les Stanford, a spokesman for the federal Bureau of Alcohol, Tobacco and Firearms.

"Common sense tells me that if Ronnie Racketeer in Boston can make some money off of contraband cigarettes, he'll do it. But I don't think he can count on it much as a main source of income."

State tax investigators say Maryland's border with Virginia (a state that adds only 9 1/2 cents to the pack of cigarettes, as compared to 24 cents in Maryland) has remained relatively quiet in recent years.

"We do routine surveillance of several outlets just over the border in Virginia," said Marvin Bond, spokesman for the state comptroller's office. "And we aren't seeing any organized activity there."

Whether that will change with the tax package now under consideration by the legislature remains to be seen, and Mr. Bond concedes that any increase in Maryland's tax is likely to encourage some cross-border smuggling, if only on a small, one-carload-at-a-time scale.

"Obviously, any time you have a higher tax, you're going to

create the potential for people to make money by avoiding that tax," said Mr. Bond.

Maryland ranks 40th among the states in its cigarette tax, but if the Senate proposal to add a dime to the excise tax passes, that ranking will jump to 22nd. And, should the alternate House proposal of a 20-cent increase pass, Maryland's cigarette tax would rank eighth in the nation. The differential between a pack of cigarettes sold in Virginia and one sold in Maryland would be 34 cents.

A conference committee is expected to resolve the issue this week. Legislative leaders have said that Gov. William Donald Schaefer has indicated that he will veto any tax package that does not include the 20-cent increase in the cigarette tax.

With a 20-cent increase, Maryland would join such states as Pennsylvania, New York, New Jersey, and Connecticut in assessing 40 cents or more on a pack of cigarettes. Those same states were the battleground in the early 1970s, when the differential in excise taxes led to widespread interstate trafficking.

In cigarette-producing North Carolina and Virginia, which taxed each pack only a few cents, truckers were lining up at smoke shops to fill tractor-trailers with contraband, which were then delivered to Northern wholesalers who counterfeited state tax stamps, or to Northern retailers, who sold unstamped cigarettes.

State officials, who lacked interstate jurisdiction, couldn't keep up.

"We actually had instances in which our investigators would go to North Carolina to conduct surveillance, but they would be escorted to the state line by Carolina troopers," said Karl Felson, spokesman for the New York taxation and finance department.

Eventually, the Eastern Seaboard states banded together to share the responsibility for surveillance and compliance. Low-tax Maryland contributed to the effort by intercepting northbound contraband traveling through the state. In 1978, the federal government entered the fray by passing an interstate statute that carried a five-year penalty and a $100,000 fine, then giving ATF enough agents and authority to enforce the new law.

State and federal officials both say that cooperation greatly reduced interstate cigarette smuggling. In addition, the methods used to monitor the state taxes improved, officials said.

In the 1970s, many states used Pitney Bowes stamp meters, which applied an ink stamp to each cigarette pack much like TC postage meter. Tax officials soon found that the method was flawed: A corrupt wholesaler could manipulate the machine's counter, stamping twice as many packs as were recorded.

In Pennsylvania and New York, federal officials were soon contending with organized crime infiltration into the wholesale cigarette market, and mob figures were believed to be skimming millions from untaxed cigarettes.

But Maryland and most other states now use specially manufactured tax stamps, which are applied to each pack of cigarettes by licensed wholesalers.

"We've had only one instance of counterfeiting in one state in 1980 and nothing since then," says John Sprawka, administrative manager at the Meyercord Co. of Carroll Stream, Ill., which produces the stamps for Maryland and 29 other states. "And we've never had an instance of employee theft."

Officials in other high-tax states have in recent years been contending with "seepage" of non-taxed cigarettes from U.S. military installations and federal reservations for Native Americans.

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